Private Saving, Public Saving, and the Inflation Tax: Another Look At An Old Issue

IMF Working Papers, April 1, 1993

Source details

Canonical URL: Private Saving, Public Saving, and the Inflation Tax: Another Look At An Old Issue

The paper provides an analytical discussion on measurement problems associated with the inflation tax.
Conventional national accounts definitions typically misplace the proceeds from the inflation tax: they are typically not subtracted from disposable income, and they are not included as part of the Government’s revenues “above the line.”
Using a simple, perfect foresight monetary model developed by Calvo (1986, 1987), the paper analyzes the difference between macroeconomically relevant concepts of public and private saving and their national accounts counterparts.
The paper shows that national account aggregates create the impression that heavier reliance on the inflation tax by the Government is associated with higher private saving, even in situations where the composition of government revenues does not have any effect on private saving.

Model: simple, perfect foresight monetary model developed by Calvo (1986, 1987).
Key analytical focus:
- Measurement problems with the inflation tax in national accounts.
- Discrepancy between macroeconomically relevant concepts of public and private saving and national accounts aggregates.
Main finding:
- National account aggregates can misleadingly suggest a positive association between heavier use of the inflation tax and higher private saving, despite no causal effect of revenue composition on private saving in some situations.

Implicit implication for fiscal analysis and public finance measurement:
- Care is required when interpreting national accounts aggregates for assessing the effects of inflation tax and government revenue composition on saving behavior.
Relevant policy topics listed in the source:
- Budget planning and preparation
- Government debt management
- Public financial management (PFM)